TY  - JOUR
AU  - Ball,Laurence
AU  - Romer,David
TI  - Inflation and the Informativeness of Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4267
PY  - 1993
Y2  - January 1993
UR  - http://www.nber.org/papers/w4267
L1  - http://www.nber.org/papers/w4267.pdf
N1  - Author contact info:
Laurence M. Ball
Department of Economics
Johns Hopkins University
Baltimore, MD 21218
Tel: 410/516-7605
Fax: 410/516-7600
E-Mail: lball@jhu.edu

David H. Romer
Department of Economics
University of California, Berkeley
Berkeley, CA 94720-3880
E-Mail: dromer@econ.berkeley.edu
AB  - This paper studies the welfare effects of the relative price variability arising from inflation. When agents interact in anonymous markets, with customers buying from new suppliers each period, relative price variability benefits customers and cannot harm suppliers substantially. But if customers and suppliers form long-term relationships, prices have an informational role: a potential customer uses current prices as signals of future prices. Inflation reduces the informativeness of current prices, causing customers to make costly mistakes about which relationships to enter. In addition, the reduced informativeness of prices makes demand less price-elastic, thereby increasing markups. Both effects can be quantitatively significant at moderate inflation rates.
ER  -